Posted on 8 March, 2019 | 2 mins
Amanda Nunn, Partnership Manager at business foreign exchange service Money Mover, has a simple but important suggestion. Manage your currency risk or suffer the cost volatility consequences!
My team and I spend much of our day speaking to SMEs and accountants who use, or are about to start using, the Money Mover web application, which is designed to bring transparency and functionality to our customers’ international payments, at the same time as saving them money.
Before we even start talking about what we do, we always ask prospective clients about how they are managing their currency debits and credits and foreign exchange transactions. We almost always find there are some simple ways to improve or optimise what they are doing, which reduces expenses and lower that risk.
After all, most of our clients are fast-growing SMEs that are fantastic at innovating in retail, life sciences or semiconductors, but don’t always have the information that they need about their financial transactions.
These conversations always seem to go beyond simple cross-border payments, and I had an interesting discussion with a Cambridge-based retailer the other day.
“But I don’t have any currency exposure”, explained the office manager of a 12-person business which sells outdoor furniture. “Our customers are all in the UK. We source our products in the UK, our warehouses and all our employees are in the UK. Everything we do is in Sterling.”
I asked the office manager about the wider commercial landscape, specifically about her competitors. It turned out the company’s biggest competitor was a larger business with a few more outlets and an active online channel. Its product catalogue was very similar and it sold its stock at a comparable cost. The key difference seemed to be that it sourced 60% of its stock from overseas. The company I was speaking to had noticed that the competitor had stepped up its sales initiatives in the last few months and seemed to be gaining traction in the market.
We discussed how fluctuations in exchange rates can quickly impact your business, when competing with overseas competitors and UK businesses that are sourcing stock from non-Sterling denominated countries. Whenever the Euro weakens, for example, products sold by your competitors that are based in the Eurozone, or which source their stock from Euro countries, become relatively cheaper. Sometimes the change can be significant, equating to an effective 5%, 10% or even 15% discount on their stock, which can make it hard to compete.
So, what can businesses do to protect themselves? There are a number of things.
From a practical perspective, retailers can investigate sourcing goods and services from suppliers operating in the currency in which their competitors operate. As Sterling strengthens, so will the cost of these goods and services fall, which provides a neat natural hedge.
A slightly more involved alternative is to use forward contracts, which allow you to lock-in a rate for buying or selling currencies at a point in the future. At the beginning of each accounting period, a business sells currencies at the prevailing rates for settlement at a future time. In time, should exchange rates move against them, profits realised on these forward agreements would go some way to mitigating reduced margins from cutting the price of their products to remain competitive.
Similarly, retailers that import from suppliers overseas can use forwards to lock in exchange rates for their invoices, and thus remove the risk of a drop in the value of the pound putting upwards pressure on costs and increased pricing to their customers. Top tip: importers who buy from abroad but currently settle their invoices in Sterling have found they can negotiate discounts of 5-10% by offering to pay in the native currency of the supplier. This is a great way to leverage the ease of use and cost savings provided by an international payments specialist like Money Mover.
What other strategies have you used to protect your businesses from cost volatility due to exchange rate risk? Is it just a necessary evil which is not worth worrying about?
However you chose to respond to it, the moral of this story is clear. While you may only do business in a single currency, your organisation could be severely impacted by currency movements.
Money Mover is the business foreign currency exchange service trusted worldwide for international business payments, personal payments and corporate FX.